I feel that I should justify the answer a little in the context of the “What to do in sideways markets” post about Vitaliy Katsenelson‘s excellent book “The Little Book of Sideways Markets“. To recap, Vitaliy’s thesis is that equity markets are characterized by periods of valuation expansion (“bull market”) and contraction (“bear market” or “sideways market”). A sideways market is the result of earnings increasing while valuation drops. Historically, they are common:

We’ve clearly been in a sideways market for all of the 2000s, and yet the CAPE presently stands at 21.22. CAPE has in the past typically fallen to a single-digit low following a cyclical peak. The last time a sideways market traded on a CAPE of ~21 (1969) it took ~13 years to bottom (1982). The all-time peak US CAPE of 44.2 occurred in December 1999, all-time low US CAPE of 4.78 occurred in December 1920. The most recent CAPE low of 6.6 occurred in August 1982. I’m fully prepared for another 13 years of sideways market (although, to be fair, I don’t really care what the market does).

If you subscribe to Vitaliy’s thesis – as I do – that the sideways market will persist until we reach a single-digit CAPE, then it might seem odd to suggest staying fully invested. In my defence, I make the following two points:

A simple, quantitative, “cheap but good” value strategy has delivered reasonable returns over the last decade in a flat market. I don’t think these returns are worth writing home about, but if my kids can dollar cost average into an ~11-12 percent per year in a flat market, they’ll do fine over the long run.

The chart on Turnkey Analyst Backtest looks very flawed to me. If you compare the performance, for example, of the Magic Formula backtested strategy (roughly 50% cumulative since eary 2006) and the “real” performance of the Magic Formula as documented recently on the MFI Diary Blog (cumulative + 6%), you start to wonder which motives lead to these outstanding “backtested” numbers… .
I have had the same underperformance in the Euro-Zone over the last 1.5 years ( a short period, I know), while those offering the European “Magic”-Formula-Screen claim to have made clear double digit returns… .

Hi Greenbackd,
Your blog ranks high on my (large) blog list. Thanks for sharing all these great posts. I was curious how you managed to find the graph from turnkey analyst. Could not find the “cheap but good” strategy in there. Perhaps it is because i don’t have a “pro” account? I think they revamped their site recently, had you collected this chart from before? thanks again.